Mumbai: Banks may need to set aside as much as Rs3.3 trillion as provisions in 2017-18 to cover for large corporate loans turned bad, a move which could lead to huge losses, said a report from Crisil Ratings.

Banks had provided Rs2.2 trillion the previous fiscal.

“With the economic value of assets underlying NPAs (non-performing loans) eroding with time—resolutions are hard to come by—banks would do well to bite the bullet and step up on provisioning, mainly for large corporate NPAs, and thus facilitate faster clean-up of their balancesheets," Crisil said in a note on Thursday.

Indian banks’ stressed assets have ballooned to Rs10 trillion. Crisil said that it arrived at the Rs3.3 trillion number after an account-by-account analysis of the economic value of assets underlying large corporate bad loans.

Crisil's commentary comes at a time when banks have referred 12 large NPA accounts to National Company Law Tribunal (NCLT) for proceedings under the Insolvency and Bankruptcy Code (IBC) following the Reserve Bank of India’s direction.

According to the analysis, potential write-downs that banks will have to do ranges from 25% to 75% of outstanding dues. Crisil added that while banks made adequate provisions against some NPA accounts, majority of them will require higher provisioning compared with current levels.

“Crisil estimates this could lead to a net loss of  (around) 60,000 crore for the banking sector this fiscal with public sector banks (PSBs) bearing the brunt of increase in provisions and the resultant impact on profitability because of their higher stock of NPAs," the rating agency said. 

According to Vydianathan Ramaswamy, associate director – ratings at Crisil, the ability of public sector banks (PSBs) to step up on provisioning and hasten clean-up of balance sheets would depend on their capital strength to absorb losses.

“While larger PSBs are better placed on this count, most of the medium and small ones will require relatively higher capital support from the government to offset such losses and also meet the capital requirements under Basel III regulations," he said.

The rating agency also said that the operating profitability, calculated before making loan and tax provisions, of banks is expected to stabilise by March-end mainly driven by improvement in the net interest income.

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